Are You Ready for the New Revenue Recognition Standard?

Unlike retail stores who generally record their revenue on the spot, companies with multiple deliverables, such as selling services or software, are more affected by the rules on revenue recognition. In an attempt to condense numerous regulations and interpretations, one new standard has been released that could improve the way companies account for revenue and deferred revenue.

The New Standard

First issued by the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) in May 2014, the new revenue recognition standard Topic 606, Revenue from Contracts with Customers, has created a bumpy transition process for many businesses.

Due to questions raised from the board’s Joint Transition Resource Group (TRG), the new standard is still undergoing clarifying changes. Originally set to begin after December 2016, the FASB disclosed it would allow public companies and certain not-for-profit entities to wait until after December 2017 to apply the standard in annual reporting periods. Private companies will have until after December 2018 to comply.

Topic 606 is a more principles-based approach that tries to reduce the complexity apparent in today’s revenue recognition guidance. SEC Professional Accounting Fellow Ashley Wright says one of the main objectives of the new standard is to “enhance revenue standards by establishing broad principles and concepts that should result in improved comparability.”

Start now

The Wall Street Journal states that “U.S. companies have hundreds of billions of dollars of deferred revenue on their books,” maximizing the importance of applying these new standards early and effectively.  Companies should follow these rules to prevent restatements, which could hurt them financially and could create a reputational risk if financial information is not perceived to be accurate.

The American Institute of Certified Public Accountants (AICPA) has provided an implementation plan to help finance professionals and CFOs during this transition period.

It’s never too early to recognize your company’s current status. Contact me or another accounting professional for help in reviewing your company’s revenue before the new standards deadline.